Thursday, July 19, 2007
Jul. 19, 2007 (McClatchy-Tribune Regional News delivered by Newstex) --
With a smoking-gun memo as evidence, a group of Minnesota insurers is suing one of the world's biggest insurance companies, claiming it cheated a state workers' compensation fund out of tens of millions of dollars over two decades.
The Minnesota Workers' Compensation Reinsurance Association filed a lawsuit Tuesday in federal court in Minnesota charging that one of its members, New York-based American Insurance Group (AIG), fraudulently understated its workers compensation business in Minnesota. That tactic allowed it to avoid paying its share of a collective statewide fund that specifically covers very large workplace injury claims, the lawsuit said.
The action sprang from an internal AIG (NYSE:AIG) memo, in which AIG's general counsel wrote an entire section on the company's practice of 'false reporting of workers compensation premiums' in Minnesota in order to pay less to this statewide fund 'than it is legally obligated to pay.'
The 1992 memo surfaced during a broader New York lawsuit, and two years ago it reached Carl Cummins, president of the Minnesota group.
AIG, which settled the New York suit last year for $1.64 billion, declined to comment on the Minnesota litigation because it is ongoing.
The Workers' Compensation Reinsurance Association is a nonprofit organization of about 600 workers' compensation insurers and self-insured employers operating in Minnesota. State law requires that they all pay the association to be their 're-insurer' -- the insurer to those insurers that covers their largest claims.
Each year, actuaries calculate the cost of expected claims, and then the association apportions member charges according to their share of the business, Cummins said.
By understating its premium totals, AIG has paid less than its share at least as far back as 1985, he said.
Workers' coverage was never in jeopardy, he said, but only because all the other insurers were then overcharged.
If successful, Cummins said a refund for insurers is possible.
'I'm not planning my life around a refund,' said Stuart Henderson, CEO of the large workers compensation carrier, Western National Mutual Insurance Co., in Edina.
'I do think they ought to pay what they owe, and pay it as soon as possible,' Henderson said. 'It would lower costs to all the insurers, and that would lower the insurance costs to all the employers in this state.'
AIG is facing similar investigations across the country, said Bill Walsh, spokesman at the Minnesota Department of Commerce, which regulates insurers, though is not involved in this case. At least 30 states belong to a national reinsurance pool similar to Minnesota's state association, and they are also looking into possible AIG under-reporting of premiums, he said.
Cummins estimates AIG's reporting practices cost the association at least $50 million.
Settlement attempts failed, he said, when AIG indicated a willingness to cover its unpaid premiums but not lost investment interest, which he says is at least half that $50 million.
'AIG has been a big player in the Minnesota market over the last 25 years,' Cummins said, at times the second- or third-largest writer of workers compensation coverage.
The lawsuit also alleges racketeering -- asserting that any false premium reports are federal mail and wire fraud -- which could triple a damage award, he said.
H.J. Cummins -- 612-673-4671 --
hcummins@startribune.com Newstex ID: KRTB-0281-18250475
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